the Treasury with specific provision for its ultimate retirement; standby authorization for the Insurance Corporation to borrow up to $750 million from the Secretary of the Treasury; a reduction in the insurance premium rate charged by that Corporation from one-eighth of 1 percent to one-twelfth of 1 percent of insured accounts and creditor obligations; a broadened investment authority for Federal associations to allow investment up to 15 percent of assets in unsecured homeimprovement loans not exceeding $1,500; and the establishment of a minimum ratio of liquid assets to be held by each member of the Federal Home Loan Bank System.

Other than provisions in the Housing Act of 1955 which reestablished the independence of the Federal Home Loan Bank Board, statutory changes since 1950 affecting its activities have been primarily concerned with the liberalization of the lending authority of Federal savings and loan associations. The maximum loan permitted by law for these institutions was increased from $20,000 to $35,000. The maximum unsecured loan amount was increased to $3,500 and certain other liberalizations were effected.

ASSOCIATION RESERVES

Primary protection of accounts of shareholders in insured associations is afforded by the reserves and undivided profits of the insured associations themselves. Under regulations pursuant to law, these institutions are required to accumulate loss reserves equivalent to 5 percent of all insured accounts within 20 years of the date of insurance. Recent amendment to the regulations of the Insurance Corporation, however, requires continued allocations to these reserves until the total of such accounts plus other accounts available for losses equal 12 percent of all insured accounts.

During the 22 years of operations of the Federal Savings and Loan Insurance Corporation there have been 38 cases in which the Insurance Corporation found it necessary to intervene. In 29 of these the Insurance Corporation has made cash contributions that restored the institutions to normal operation, in 2 instances the Corporation purchased assets followed by merger or voluntary liquidation, and in the remaining 7 cases the savers were reimbursed directly and the assets of the institutions were liquidated. Net payments for losses, from income of the Insurance Corporation, as of June 30, 1956, approxmated $5,200,000.

BOARD ACTION TO COUNTER INFLATION

During the period since 1950 the authority of the Board has been used in concert with that of the Board of Governors of the Federal Reserve System, the Treasury Department, and other monetary agencies in applying credit restraints consistent with Federal fiscal policy. In 1950 the Board acted to restrain access to Federal homeloan bank advances shortly after the outbreak of fighting in Korea. This action, later suspended in designated critical defense-housing areas at the discretion of the respective Federal home-loan banks, reduced the line of credit available to members for loan expansion

purposes from 50 to 30 percent of each member's borrowing capacity. Authority to ease these emergency limitations was delegated by the Board to each district Federal hone-loan bank early in 1952.

The Board again in September 1955 found it necessary to restrain advances by the Federal home-loan banks for loan expansion purposes and to call for a reduction of bank advances outstanding. In July of that year it became apparent that net savings receipts were not keeping pace with the extraordinary demands for funds. Action by the Board in December of that year and in April and May of 1956 partially relaxed the original restrictions.

PART III. SEPARATION OF FHLBB AND FSLIC

SCOPE OF STUDY

The central issue of Reorganization Plan No. 2 and hence of this study is the question of separation of the FHLBB and the FSLIC. Separation was advocated by the administration to eliminate a possible "inherent conflict of interest." This conflict was first referred to in reports of the General Accounting Office for the years 1945 through 1949. It arose from the belief that the Home Loan Bank Board promoted and chartered savings and loan associations. and, at the same time, by reason of its control over the FSLIC, administered Federal insurance of the accounts of those associations. Essentially the alledged conflict lies in the assumption that the Board, if desirous of promoting and chartering savings and loan associations, might, as a result of these functions, incur improper liabilities for the Federal Savings and Loan Insurance Corporation and thus expose it to possible losses. The Insurance Corporation, it was argued, should be independent and have authority to "pass upon" the risks it assumes. The answer to the question of separation depends upon (a) whether there exists an "inherent conflict of interest" in the present method of operation of the Board and the Corporation, and (b) whether the proposed separation would contribute to objectives such as

(1) protecting the interests of the Corporation and the Treasury; (2) increasing the efficiency of present operations;

(3) reducing costs of operations; and

(4) promoting public confidence.

However, this central issue is related to and affected by other questions such as supervision of member associations and Federal participation in the examination of State savings and loan associations. Every effort has been made to present these collateral matters in proper perspective, keeping in mind that the objective of this study is to evaluate Reorganization Plan No. 2 and where possible to recommend more efficient methods of serving the public interest by providing thrift and homeownership facilities while minimizing the Federal Government's liability in the insurance of accounts. This study, therefore, had been broadened somewhat in order to include the collateral problems noted.

Some of these problems have a direct relation to Reorganization Plan No. 2. Others have no connection with plan No. 2 but are concerned with the more efficient operation of the Federal Home Loan Bank Board, the FSLIC, and the HLB system.

CONFLICT OF INTEREST ISSUE

Growth of insurance risks.-If there is a "conflict of interest" it would be manifested in the actions of the Board to charter, and so to increase the number of insured associations over the objections of the FSLIC, so as to expose the Corporation to risks which it should not properly

assume.

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The import of the testimony before both Houses of Congress, interviews conducted by the staff, and formal replies forwarded to the subcommittee by Government agencies and private groups is that uneasiness over the "conflict of interest" issue has developed for the most part as a result of the extraordinary growth of savings and loan associations since 1945.

Actually there are fewer associations today than there were in 1945. In 1945 all associations, insured and uninsured, totaled 6,149, while in December 1955 there were only 6,060 such associations. However, the total assets of these associations have grown from $8,747 million in 1945 to $37,880 million by the end of 1955.

The number of insured associations has increased from 2,475 in 1945 to 3,544 in 1955, an increase of 1,069. Of this number 216 were federally chartered and 853 State chartered. (Federally chartered associations must be insured while State chartered associations may be insured.)

The potential liability of the FSLIC increased from $4,820 million on June 30, 1945 to $32,127 million on June 30, 1956. (This potential liability is made up of $30,672 million in insured accounts up to $10,000 and $1,455 million in creditor liability.)

Thus, in number of associations granted insurance during the 10year period, only about 20 percent represented insurance risk assumed as a result of a Federal charter. About 80 percent of the newly insured associations were previously chartered by a State. It is reasonable to assume that the newly chartered Federal associations started business with relatively small insurance risks whereas the State chartered associations, having already been in business prior to granting of insurance, represented substantially higher insurance risk.

Participation of FSLIC in growth of insurance risk. This growth creates added risk for the FSLIC as the number of insured accounts increases. But how was this added risk approved and accepted? Was it by arbitrary action of the Board over the objections of the Insurance Corporation, or did the Insurance Corporation have a voice in the assumption of these risks?

Correspondence from the Bureau of the Budget tends to convey the impression that by arbitrary action the Board makes decisions with respect to the issuing of Federal charters which under the law imposes upon the Corporation the duty to insure the deposits of an association without recourse.

The correspondence is quoted in part as follows:

The relationship between the chartering of new Federal associations and the insurance of the share-accounts of such associations might well be clarified, since the present law is ambiguous. This ambiguity may be illustrated by the following excerpts from section 403 of the National Housing Act, as amended:

(a) "It shall be the duty of the [Federal Savings and Loan Insurance] Corporation to insure the accounts of all Federal savings and loan associations ** (403 (a)).

(b) "Application for such insurance shall be made immediately by each Federal savings and loan association * **"" (403 (b)).

(c) "The Corporation shall reject the application of any applicant if it finds that the capital of the applicant is impaired or that its financial policies or management are unsafe; and the Corporation may reject the application of an applicant if it finds that the character of the management of the applicant or its home financing policy is inconsistent with economical home financing or with

the purposes of this title ***" (403 (c)).

In view of the above language, it would appear to be at least theoretically possible for the FHLBB to charter a new Federal savings and loan association which did not meet the standards of the FSLIC for admission to insurance. Nevertheless, it might be considered the "duty" of the Corporation to insure the accounts of such an association. We believe that it would be sound policy and consistent with the probable intent of the Congress to amend the existing provisions to remove this ambiguity and to make the issuance of a new Federal charter clearly conditional upon a determination by the Corporation that the association is acceptable for insurance. The FSLIC should have the final right to pass upon the risks which it assumes.

In actual practice the FSLIC does "pass upon" the risks it assumes. The policy and practice of the FHLBB is as follows:

CHARTERING AND INSURING FEDERAL ASSOCIATIONS

The applicant group files its application with the district home-loan bank. The bank considers the application and forwards it with recommendation to the Division of Federal Savings and Loan Operations of the Home Loan Bank Board. The application, with the recommendation of the Division of Federal Savings and Loan Operations, is forwarded to the Federal Savings and Loan Insurance Corporation for concurrence. It is at this point that the FSLIC must recommend for or against granting insurance to the applicant group. Only after the FSLIC has made its recommendation is the application forwarded to the bank board for formal action.

INSURING STATE ASSOCIATIONS

The applicant submits its application to the district Federal home-loan bank which forwards the application together with its recommendation to the Federal Savings and Loan Insurance Corporation. The Federal Savings and Loan Insurance Corporation, after considering the application, forwards it to the Division of Federal Savings and Loan Operations for review and opinion as to sufficiency of compliance. (The Board having previously given conditional approval to the application, the final approval is given by the General Manager of the FSLIC and the Director of Division of Federal Savings and Loan Operations pursuant to authority delegated by the Board to these groups respectively.)1

1 See operational charts, pp. 103, 104.